Question
Michelle's active cash flow management revealed a short-term cash flow deficit in the next 30 days. She needs to borrow $6 Million cash for a
Michelle's active cash flow management revealed a short-term cash flow deficit in the next 30 days. She needs to borrow $6 Million cash for a period of 90 days. She is planning to issue 90-day Commercial Paper in 30 days. She is risk averse and planning to hedge using 90-day Treasury bill futures for hedging any associated interest rate risk. (Margin requirement per contract = $10000 and discount rate is 9%, Commission per contract = $60) (Face Value of each contract: $1M) Interest Rates: Today: 90-day Commercial Paper: 4.50%; 90-day Treasury Bills: 4.25% 30-days from now: 90-day CP: 5.25%; 90-day Treasury Bills: 5.10%
Part A: What will the sign of the face value of her Cash position and Hedge position?
Part B: Estimate the net hedge position.
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